Trend investing: I’ve seen the future and it will be

28-04-2016 | Insight

How should you go about investing in developments that will shape the future? Robeco trend investor Henk Grootveld has some answers. And Jack Neele explains how he reflects the digitalization megatrend in the portfolio holdings of his Robeco Global Consumer Trends Equities investment fund. The do's and don'ts of trend investing.

Henk

Grootveld

Head of the Trends Investing Equity team and Portfolio Manager

Jack

Neele

Portfolio Manager

Speed read

The winners are the companies that use trends to create new sales and profit-making opportunities

Digitalization also puts the brand above the product

8 tips for trend investing

Investing in the future? That sounds a little like predicting the future and that’s a tricky business. But we can already identify certain developments that will shape the future to some extent. One example is global climate change and the effects this will have on the availability of food and water. There are demographic developments such as the aging population worldwide and the rising middle class in non-Western countries and increasing wealth in these regions. At the same time there is constant innovation in robot technology, automation, information and communication technology, digitalization and genetics.

These are so-called megatrends, ongoing themes that will have a far-reaching impact on our society, economy, culture and the way in which we live and work – both now and in the future. Trends that are already evident, that will continue for the next few decades, and that will determine the future.

Don't look for the winners, just avoid the losers

Investors can take advantage of these megatrends. Trend investing is investing in companies that are set to benefit from these developments and use them to create opportunities to enhance sales, profits and corporate value. This is of course long-term investing – with an investment horizon out to 2025 and beyond.

"When investing in trends it is often easier to avoid the losers than to find the winners", says Henk Grootveld, head of trend investing at Robeco. “We are used to looking for winners, but in this case it's easier to avoid the losers. Tomorrow's losers are very often today's monopolies – businesses that are too inflexible or frightened to fully embrace a trend, especially when it comes to technology. Kodak and Nokia are well-known examples.”

Another strategy for investing in trends is the bucket-and-spade strategy. Grootveld: “This means that an investor is better off investing in suppliers than on try to guess who is going to strike it lucky. It is hard to determine who will launch the world’s first self-driving car. Will it be Google, Tesla, Apple or maybe a traditional car manufacturer? But what investors do know is that these cars are full of sensors and powered by electricity so they can invest in manufacturers of sensors and batteries.”

Interaction with the digital consumer

Jack Neele, Portfolio Manager of Robeco Global Consumer Trends Equities, carries this digitalization trend through to the consumer. The 'digital consumer' is one of the three pillars supporting the investment philosophy of his fund. The other two are the ‘emerging market consumer’ and ‘strong brands’. "Consumers are increasingly spending more time on ordering goods on the internet using mobile devices", says Neele. Which made the 'strong brand' pillar a rather obvious choice for him. “Consumers are attracted to brand products. This always has been and will be the case. Strong brands have also developed in our digital world of smartphones and tablets, software, apps, search engines and online shopping in recent years. Take Apple, Google, Facebook and Amazon, for example.”

'Digitalization changes the way in which brands communicate with consumers'

Neele also focuses on strong brands that embrace digital technology and thus develop a competitive advantage. “They perceive digital technology as a friend, rather than the enemy.” The fund manager refers companies that implement digital techniques in an innovative way to Simon Sinek's concept of ‘the golden circle'. This strategist states that companies know what they are doing and how they are doing it, but not why they are doing it. According to him truly innovative companies start with the why. In his famous Ted talk, Sinek explains that an innovative company like Apple doesn't say that it makes fantastic computers but that it approaches things in a different way – it wants to make beautifully designed products that are simple to use.

Not only technology companies apply this strategy and use digital techniques to differentiate themselves and strengthen their business model, according to Neele, consumer brands like Disney, Starbucks and Nike also do this. “Nike Plus is a good example. Nike puts a chip in its running shoes that communicates with Nike Plus, an app on your smartphone, tablet or PC. The wearer can see the exact route he has travelled including the distance and the time. This information can then be shared with friends via social media such as Facebook and Twitter."

“But why did Nike develop this app, what is the underlying business model?” asks Neele refering to the important 'golden circle' question. “Nike Plus gave the company direct access to its customers. People running using Nike shoes were captured in an ecosystem and Nike was no longer competing on product – we have the best running shoes – but on the access it offered to an ecosystem in which wearers could register their running performance. Nike indicated when it was time to replace your running shoes which also had a positive effect on the company's sales.”

“It also had a positive impact on the market. The benefits the app offered consumers led to word-of-mouth advertising and Nike could focus its marketing more on new potential runners. The app strengthened the brans itself too. Nike was no longer offering just a product, it was offering a service. And as a result of the data provided by Nike Plus, the sport brand discovered that its shoes were actually being used for walking 60 percent of the time rather than for running."

Disney and Starbucks have comparable applications where they offer their customers services, generate increased loyalty and get to know them better. Visitors to Disney theme parks can use a digital bracelet which gives them access to the park and they can use it to pay and join the ‘fast lane’ for attractions. Starbucks has developed a mobile phone app which enables customers to place an order and indicate the store where they would like to pick it up, so it is ready when they get there. ”

According to Neele, these examples demonstrate that over the years digitalization has not fundamentally changed branding. “But it has changed the way brands reach their customers and communicate with them. Digitalization also puts the brand above the product. It is not about lightweight shoes, the speed of a processor or iced cappuccinos. It is about how consumers perceive a brand. New technologies enable companies to offer customers access to a digital platform or ecosystem that can help lock these customers in and make the brand relevant.”

The do’s and don’ts of trend investing

Don’t underestimate the speed of a trend Trend investing is riddled with hypes. But hype doesn't necessarily mean that something isn't real, just that it’s exaggerated. The underlying trend towards digitalization will continue but in many areas it may happen rather gradually.

Don't make the mistake of thinking that the Western world is ahead of the game In terms of applying digital techniques for consumer goods the US is miles ahead of the field. But China is further ahead when it comes to e-commerce. There are not many shops in the Chinese hinterland and that is why everybody buys online. Emerging economies often skip a phase. Africa has moved straight to mobile phones and all the associated mobile applications, leap frogging fixed telephony altogether. The same could occur when solar power is rolled out. Europe is more industrially oriented and is heading the field in the development of digital applications for the manufacturing industry.

Don't look for the winners, avoid the losers It is easier to avoid the losers than to find the winners. Especially when a trend has not yet reached the mature phase. Technology has made it painfully obvious that today's winners can be tomorrow's losers. Kodak, once a leading player in photography, missed out on the rise of the digital camera and went bankrupt. Nokia experienced the ‘law of the handicap of the head start’ and was overtaken on all sides by smartphone manufacturers.

Use the bucket-and-spade strategy If, as an investor, you are unable to identify the winners you would be better off investing in the suppliers. It is hard to determine who will launch the world’s first self-driving car. Will it be Google, Tesla, Apple or maybe a traditional car manufacturer? But what investors do know is that these cars are full of sensors and powered by electricity so they can invest in manufacturers of sensors and batteries.

Look at whether companies are embracing digital technology Companies that are interesting from an investment perspective have predictable turnover and earnings growth. But that is not enough. Successful companies use digital technology, for example, to set up an extra sales channel (webshop or app in addition to a physical shop), a new service, or to communicate with customers.

Check out the workforce Does the company take on programmers and data analysts that can implement digital data in the company’s relationship with its customers and use it to create new products and services?

Look for a permission to fail Does the company create 'labs' where it can work on new products and services and where employees are given permission to fail? Fear of failure is the greatest threat to innovation.

Check that companies ask themselves why Innovative and successful companies first ask themselves why they are doing what they are doing. Only then do they answer questions about what they are doing and how they are doing it.

Robeco and trend investing

Also have a look at the mutual funds Robeco Global Consumer Trend Equities which invests in the digital consumer, the emerging consumer and strong brands, Robeco New World Financial Equities which invests in 'digital finance' or ‘fintech’ and Rolinco an fund which more general invests in structural trends.

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